We’ve all heard it said that there are two things in life that are certain–Death and Taxes. But wait: In bankruptcy, there are some taxes that you can avoid.
Taxes first due within three years of the date a bankruptcy petition is filed and taxes assessed within 240 days of the bankruptcy filing, or which are unassessed but assessable when the case is filed, are considered priority claims which are not subject to discharge.
However, if you owe state or federal income taxes which were due more than three years before you filed your bankruptcy petition, those taxes can be discharged in a Chapter 7 or Chapter 13 bankruptcy case, just like any other unsecured debt. When a debt is discharged in bankruptcy, it means you will never have to pay it.
There is more good news. If you do owe income taxes that are less than three years old, those taxes must be paid in full as part of a Chapter 13 payment plan. However, the penalties associated with those taxes can be treated as a non-priority claim in a Chapter 13 plan, which means that only a fraction of those penalties have to be paid, and in a Chapter 13 plan, the priority tax does not continue to incur interest during the case. If all payments are made under the plan, that interest will never have to be repaid, meaning that the tax accrues NO INTEREST for the full five years of the plan.
Beware, however, that taxes for which no return has been filed are not dischargeable in bankruptcy. If a return was filed late, for a year outside of the three year priority tax period, the return must have been on file for two years for the tax to be discharged in bankruptcy.
If you owe delinquent taxes, and would like more information about how the bankruptcy laws will apply to your tax obligations, please contact us to set up a FREE half-hour consultation.